Student loan borrowers may be repaying too much

JillianBerman

Reporter

Paying back student loans is more difficult than it needs to be. And the government isn’t doing enough to help, a new report suggests.

Millions of borrowers may be needlessly struggling to pay back their student loans because the Department of Education and student loan servicers aren’t doing enough to make sure they have information about programs that would make payments more manageable, a new report suggests.

As of September 2012, about half of borrowers with federal student loans were eligible for to participate in an income-based repayment plan — which caps borrowers’ payments at a certain percentage of their income. But according to a report released by the Government Accountability Office Thursday, just 13% of borrowers actively repaying their loans were taking advantage of the plans as of September 2014. These plans go a long way in keeping borrowers current on their loans, the report found. Less than 1% of borrowers in income-based repayment plans default on their loans compared with 14% of borrowers in standard repayment programs.

This chart from the GAO report shows the difference in default rates on various repayment plans.

Despite the efficacy of these programs, the Department and its servicers—the private companies that are borrowers’ main point of contact during the repayment process—aren’t doing enough to make borrowers aware of their repayment options, the report claims.

The Department provides borrowers with information about their repayment options during entrance and exit loan counseling, on its website and through social media. But borrowers have to actively seek information about their options during repayment, which could keep them from enrolling, the report argues.

In addition, the Department hasn’t given servicers specific instructions as to how they should communicate repayment options to borrowers, instead providing a financial incentive to keep them current on their payments. That’s resulted in borrowers receiving unclear information, the report found, citing for example, information on billing statements that mentions repayment programs that could help borrowers in distress manage their loans without identifying specific plans.

Even the financial incentives that are currently in place do little to encourage servicers to spend the time it takes to enroll borrowers in a program that suits their needs, said Rohit Chopra, the former student loan ombudsman at the Consumer Financial Protection Bureau and a senior fellow at the Center for American Progress, a left-leaning think-tank.

“As a former regulator, I saw closely there can be conflicts of interest between servicers and borrowers. Servicers may not want to invest the time to help a borrower stay afloat because they don’t get paid much extra for doing so,” he said. Chopra said he’s concerned servicers are opting to enroll borrowers in forbearance—a program that allows borrowers to delay payments, while the interest accrues—which he calls a “band-aid solution” to a borrower’s struggles.

“This is eerily similar to what we saw in the subprime mortgage crisis where servicers did not have a financial incentive to keep borrowers out of foreclosure,” he added.

The situation isn’t as dire as the GAO claims, Department officials say. The Department has taken steps to provide borrowers with more information about income-driven plans in recent months, which are reflected in an increase in borrowers enrolling in the plans, wrote James Runcie, the Department’s chief operating officer, in a letter responding to the report. That recent uptick isn’t captured in the GAO’s analysis, Runcie noted.

“The Obama Administration has taken historic steps to give borrowers, especially those who are struggling to repay their loans, better options to manage their student debt and to make sure they know about those options,” Denise Horn, a Department of Education spokeswoman, said in a statement.

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